Lock, Edmund Chew Khuen and Loo, Yoong Hang and Ong, Hwa Sin and Peh, Ching Yan (2020) The trilemma constraint - will international reserve or financial development breaks the rule. Final Year Project, UTAR.
Abstract
This research paper is conducted to determine the relationship between the economic growth and Trilemma policy. The Trilemma policies are exchange rate stability, monetary independence and financial openness. However, it is impossible to achieve all policies simultaneously which can be also known as “impossible trinity”. Therefore, due to the constraint of the Trilemma policy, there is an extension of study to determine the economic growth and Trilemma policy with the interaction term of international reserve and financial development where the financial development to replace financial openness in order to achieve “possible trinity”. The variables involved are Trilemma policy index which are exchange rate stability index, monetary independence index, financial openness index, international reserve and financial development. There are total of 149 countries had been chosen according to the income level of the country respectively to conduct the research. The period of data is from 1981 to 2017 and is collected on annual basis. Besides, unbalanced panel data had been chosen in order to conduct in this research and panel unit root tests, panel model estimation and specification tests analysis will be carried out. In the findings, it is still unable to maximize the economic growth though Trilemma policy with the presence of international reserve. However, the trilemma policy only shows statistically significant to the economic growth with the presence of financial development for high income countries. The findings of this study carry important implications for government policymakers and researcher for a reference or suggestion.
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